Every business faces uncertainty and events which are a threat to growth, profitability, and it’s survivability. The CFO Guidebook by Steven M. Bragg defines risk as “…an event that interferes with the ability of a business to achieve its objectives…” Risks take many forms. One way to begin to gain a perspective of risk is to group them into relevant categories. This article will briefly address four types of risk: Hazard, Operating, Financial and Strategic.
Hazard Risks – These are some of the most obvious risks that all of us encounter day to day. They include fires, floods, tornados and other “acts of God”. While they are not specifically business risks, the fact is no business is immune from the risks of a natural disaster. Fortunately this type of risk can be shifted to a third party such as an insurance company.
Operating Risks – These are the risks associated with operating a business and include action or inactions by employees, vendors, customers, equipment, software and virtually anything else that can throw a monkey wrench into the efficient and effective operation of the business. During my years in the Navy, I noticed that the consumption of pencils and notebook paper took a definite spike in late August, just before school started. Clearly employees were obtaining school supplies for their kids. Apparently they didn’t understand that they were stealing or perhaps they felt that this was a benefit of being a government employee.
Financial Risks – While individuals as well as businesses encounter financial risk, it is the business risks that are the focus of this article. Financial risk is generally a risk that is external to the business. For example, customers may extend the number of days they take to pay for the products or services. For those businesses that sell internationally, exchanges rate may fluctuate frequently throughout the week or even the day. Businesses that have a line of credit or variable rate loans my find interest rates changing unexpectedly.
Strategic Risks – Steven Bragg suggest that this is the most dangerous type of risk for, as he reasons, this type risk has the potential for interfering with the company’s value proposition. Some examples that he cites include the following:
- A sudden shift in technology may result in key products becoming obsolete. As an example, Kodak failed to grasp the significance of the digital camera.
- Environmental groups may bring pressure to bear that may prevent continued sale of a product or line of products. Note the resistance to genetically engineered
- Failure of a new product to be embraced by consumers. Despite the investment of millions, IBM’s PCjr failed miserably.
The four categories of risk presented above represent real threats to businesses. Owners are wise to take steps to mitigate each of these risks to the extent appropriate.